Slight increase of the real estate bubble index

Zurich, 5 May 2017 – The UBS Swiss Real Estate Bubble Index remained in the risk zone in Q1 2017 at 1.39 index points. The index increased moderately over the slightly revised figure for the previous quarter. The rise was driven mainly by a slight acceleration in nominal price increases for owner-occupied homes amid stagnant rents and income. Demand for buy-to-let investments rose as well.

Stagnant rents caused the buy-rent ratio to deteriorate for the tenth time in a row in Q1 2017. At the same time, the percentage of loan applications received by UBS for properties not intended for personal use experienced another slight increase. This can be explained by the fact that buy-to-let investments can produce high returns on equity if they are highly leveraged.

Given the continued large number of building permits, it seems likely that construction activity will remain (too) strong in this current year. We estimate that the construction of new apartments will exceed the additional demand for apartments by approximately five to ten thousand units this year. This should keep rents on a downward trajectory, particularly for new apartments. In other words, life is about to get even more difficult for landlords. Investor demand for owner-occupied homes is primarily attributable to the entrenched expectation that interest rates will remain low. However, a rate increase would most likely bring strong demand for buy-to-let investments to an abrupt halt.

The performance of the real estate bubble index was hampered somewhat by a higher inflation rate. The quarter-on-quarter increase of 0.6 percent in consumer prices was only a one-time effect, though. UBS Chief Investment Office Wealth Management expects the inflation rate to average just 0.4 percent for the whole year. Nevertheless, the imbalances in the owner-occupied housing market should abate somewhat by year-end. Current leading indicators point to an acceleration in economic growth while owner-occupied home prices are expected to flatten out by the end of the year.

Methodology
Depending on its current value, the index falls into one of the following risk categories: slump, balance, boom, risk and bubble. These categories are specifically defined and ranked in order of risk. The UBS Swiss Real Estate Bubble Index comprises six sub-indices that track: the relationship between purchase and rental prices, the relationship between house prices and household income, the development of house prices relative to inflation, the relationship between mortgage debt and income, the relationship between construction and gross domestic product (GDP), and the ratio of loan applications filed for intended rental properties to total loan applications filed by UBS private clients.

The regional risk map shows those regions posing the greatest macroeconomic risks in the event of a Swiss-wide correction. The analysis is based on the population size, the price level and the price behavior for owner-occupied homes. The selection of risk regions is linked to the UBS Swiss Real Estate Bubble Index. Vacancy or liquidity risks are not taken into account.

Risk regions for the Swiss residential property market and regions with a price correction of more than 5 percent since 2013

UBS Switzerland AG

Contacts

Claudio Saputelli, Head Swiss & Global Real Estate, Chief Investment Office WM
Phone +41-79-513 50 45

Dr. Matthias Holzhey, Head Swiss Real Estate Investments, Chief Investment Office WM
Phone +41-44-234 71 25

The UBS Swiss Real Estate Bubble Index report is available on the Internet via this link: www.ubs.com/swissrealestatebubbleindex-en.

The index is published on a quarterly basis. The next date of publication for the UBS Swiss Real Estate Bubble Index is 8 August 2017.

www.ubs.com